The IRS has the right to audit your business to ensure that taxes were correctly reported and paid. If the audit reveals an underpayment, the IRS will assess additional tax and any related interest and penalties. At what point can you breathe a sigh of relief and confidently toss old records and receipts?
Generally, the IRS will audit returns from the past three years. If auditors discover a substantial issue, they may increase the audit scope to include additional years. The IRS typically won't audit more than six years prior unless it has reason to suspect fraud or you never filed a return.
How Far Back Can a Business be Audited by the IRS?
The IRS is subject to a statute of limitations that sets a maximum amount of time that the IRS has to initiate an audit.
- The default audit window is typically three years.
- The IRS has six years to audit a business when there are substantial omissions or errors on the return.
- There is no statute of limitations for fraudulent or false returns or a return that was never filed.
General Statute of Limitations: 3 Years
The statute of limitations for assessing additional taxes or charges is generally three years after a return is due or filed, whichever is later.
- If a return was due on April 15 but you filed early, the statute runs for three years from April 15.
- If you got an extension until October 15, the statute runs for three years from October 15, even if you filed earlier.
- If you filed your return late but did not have an extension, the statute runs for three years from your (late) filing date.
Although the default statute of limitations is three years, the IRS generally tries to audit tax returns as soon as possible after they are filed, so most audits are conducted on returns filed within the past two years.
Extended Statute of Limitations: 6 Years
In cases where the IRS deems a return to have "substantial omissions," the statute of limitations increases from the default three-year period to six years. The extended statute of limitations for substantial omissions applies when:
- Gross income is under-stated by more than 25%
- At least $5,000 of income related to undisclosed foreign financial assets is omitted from a return
You should be aware that once the IRS opens an audit due to one of these omissions, they can assess taxes and penalties for any findings resulting from the audit – not only findings directly related to the omission. This means that even if certain errors were reported and not audited within the original three-year audit window, the IRS can include those findings in the current audit.
No Statute of Limitations
In certain situations, the IRS has no statute of limitations and may assess taxes, penalties, and interest indefinitely. This is the case if:
- You failed to file a return that was due
- You filed a fraudulent or false return
How Long Should You Save Business Records?
Rather than living in dread of an audit, you should follow sound accounting practices and maintain organized and detailed records of business income, expenses, and any tax-related items. As a general rule, most accountants recommend that you keep supporting documents for seven years in case the IRS chooses to audit your business or you need to file an amendment to claim a refund.